Intermediate accounting IFRS 3rd ch07

Prepared by Coby Harmon University of California, Santa Barbara Westmont College 7-1 CHAPTER Cash and Receivables LEARNING LEARNINGOBJECTIVES OBJECTIVES After studying this chapter, you should be able to: Indicate how to report cash and related items Define receivables and explain accounting issues Explain additional accounting issues related to accounts and notes receivables Explain accounting issues related to valuation of accounts receivable 7-2 Explain accounting issues related to recognition and valuation of notes receivable related to their recognition PREVIEW OF CHAPTER Intermediate Accounting IFRS 3rd Edition Kieso ● Weygandt ● Warfield 7-3 LEARNING OBJECTIVE Cash Indicate how to report cash and related items Cash  Most liquid asset  Standard medium of exchange  Basis for measuring and accounting for all other items  Current asset  Examples: Coin, currency, available funds on deposit at the bank, money orders, certified checks, cashier’s checks, personal checks, bank drafts and savings accounts 7-4 LO Cash Reporting Cash Cash Equivalents Short-term, highly liquid investments that are both a) readily convertible to cash, and b) so near their maturity that they present insignificant risk of changes in value Examples: Government bonds, commercial paper, and money market funds 7-5 LO Reporting ReportingCash Cash Restricted Cash Companies segregate restricted cash from “regular” cash Examples, restricted for: (1) plant expansion, (2) retirement of long-term debt, and (3) compensating balances ILLUSTRATION 7.2 Disclosure of Restricted Cash 7-6 LO Reporting ReportingCash Cash Bank Overdrafts Company writes a check for more than the amount in its cash account  Generally reported as a current liability  Included as a component of cash if such overdrafts are repayable on demand and are an integral part of a company’s cash management (such as the common practice of establishing off setting arrangements against other accounts at the same bank) 7-7 LO ILLUSTRATION 7.2 Classification of Cash-Related Items 7-8 LO LEARNING OBJECTIVE Receivables Receivables Define receivables and explain accounting issues related to their recognition Receivables - Claims held against customers and others for money, goods, or services Oral promises of the purchaser to pay for goods and services sold Accounts AccountsReceivable Receivable Written promises to pay a certain sum of money on a specified future date Notes Notes Receivable Receivable 7-9 LO Receivables Non-Trade Receivables Advances to officers and employees Advances to subsidiaries Deposits paid to cover potential damages or losses Deposits paid as a guarantee of performance or payment Dividends and interest receivable Claims against: Insurance companies for casualties sustained; defendants under suit; governmental bodies for tax refunds; common carriers for damaged or lost goods; creditors for returned, damaged, or lost goods; customers for returnable items (crates, containers, etc.) 7-10 LO The Imprest Petty Cash System Steps: If the company decides that the amount of cash in the petty cash fund is excessive by $50, it lowers the fund balance as follows Cash 50 Petty cash 7-90 50 LO Physical Protection of Cash Balances Company should 7-91  Minimize the cash on hand  Only have on hand petty cash and current day’s receipts  Keep funds in a vault, safe, or locked cash drawer  Transmit each day’s receipts to the bank as soon as practicable  Periodically prove the balance shown in the general ledger LO Reconciliation of Bank Balances Schedule explaining any differences between the bank’s and the company’s records of cash Reconciling Items: 7-92 Deposits in transit Outstanding checks Bank charges Bank credits Bank or depositor errors Time Lags LO Reconciliation of Bank Balances ILLUSTRATION 7A.1 Bank Reconciliation Form and Content 7-93 LO Reconciliation of Bank Balances To illustrate, Nugget Mining Company’s books show a cash balance at the Melbourne Bank on November 30, 2019, of $20,502 The bank statement covering the month of November shows an ending balance of $22,190 An examination of Nugget’s accounting records and November bank statement identified the following reconciling items 7-94 A deposit of $3,680 that Nugget mailed November 30 does not appear on the bank statement Checks written in November but not charged to the November bank statement are: Check #7327 $ 150 #7348 4,820 #7349 31 Nugget has not yet recorded the $600 of interest collected by the bank November 20 on Sequoia Co bonds held by the bank for Nugget Bank service charges of $18 are not yet recorded on Nugget’s books The bank returned one of Nugget’s customer’s checks for $220 with the bank statement, marked “NSF.” The bank deducted $220 from Nugget’s account Nugget discovered that it incorrectly recorded check #7322, written in November for $131 in payment of an account payable, as $311 A check for Nugent Oil Co in the amount of $175 that the bank incorrectly charged to Nugget accompanied the statement LO Reconciliation of Bank Balances ILLUSTRATION 7A.2 Sample Bank Reconciliation 7-95 LO Reconciliation of Bank Balances Journalize the required adjusting entries at November 30 Cash 600 Interest Revenue 600 (To record interest on Sequoia Co bonds, collected by bank) Cash 180 Accounts Payable 180 (To correct error in recording amount of check #7322) Office Expense (bank charges) Cash 18 18 (To record bank service charges for November) Accounts Receivable Cash 220 220 (To record customer’s check returned NSF) 7-96 LO GLOBAL ACCOUNTING INSIGHTS LEARNING OBJECTIVE Compare the accounting procedures for cash and receivables under IFRS and U.S GAAP The basic accounting and reporting issues related to recognition and measurement of cash and receivables is similar between U.S GAAP and IFRS For example, the definition of cash and cash equivalents as well as the use of allowance accounts, how to record discounts, use of the allowance method to account for bad debts, and factoring are similar for both IFRS and U.S GAAP In the wake of the international credit crisis, the Boards worked together to improve the accounting for loan impairments and securitizations 7-97 LO GLOBAL ACCOUNTING INSIGHTS Relevant Facts Following are the key similarities and differences between U.S GAAP and IFRS related to cash and receivables Similarities • The accounting and reporting related to cash is essentially the same under both U.S GAAP and IFRS In addition, the definition used for cash equivalents is the same • Like IFRS, cash and receivables are generally reported in the current assets section of the statement of financial position (balance sheet) under U.S GAAP 7-98 LO GLOBAL ACCOUNTING INSIGHTS Relevant Facts Following are the key similarities and differences between U.S GAAP and IFRS related to cash and receivables Similarities • Like IFRS, for trade and other accounts receivable without a significant financing component, an allowance for uncollectible accounts should be recorded to result in receivables reported at cash (net) realizable value The estimation approach used is similar to that under IFRS • Similar to U.S GAAP, IFRS requires that loans and receivables be accounted for at amortized cost, adjusted for allowances for doubtful accounts 7-99 LO GLOBAL ACCOUNTING INSIGHTS Relevant Facts Differences • Under IFRS, companies may report cash and receivables as the last items in current assets under IFRS Under U.S GAAP, these items are reported in order of liquidity • While IFRS implies that receivables with di fferent characteristics should be reported separately, there is no standard that mandates this segregation U.S GAAP has explicit guidance in the area 7-100 LO GLOBAL ACCOUNTING INSIGHTS Relevant Facts Differences • Unlike U.S GAAP, IFRS has a different approach to estimating uncollectible accounts on receivables with a significant financing component (e.g., notes receivable) For long-term receivables that have not experienced a deterioration in credit quality after origination, uncollectible accounts are estimated based on expected losses over the next 12 months For long-term receivables that experience a credit quality decline, uncollectible accounts are estimated based on lifetime expected losses (which is the model used under U.S GAAP for all receivables) • 7-101 Under IFRS, bank overdrafts are generally reported as cash Under U.S GAAP, such balances are reported as liabilities LO GLOBAL ACCOUNTING INSIGHTS Relevant Facts Differences • IFRS and U.S GAAP differ in the criteria used to account for transfers of receivables IFRS is a combination of an approach focused on risks and rewards and loss of control U.S GAAP uses loss of control as the primary criterion (see the About the Numbers discussion below) In addition, IFRS generally permits partial transfers; U.S GAAP does not 7-102 LO GLOBAL ACCOUNTING INSIGHTS On the Horizon Both the IASB and the FASB have indicated that they believe that financial statements would be more transparent and understandable if companies recorded and reported all financial instruments at fair value With the recently issued guidance on impairments by both boards, IFRS and U.S GAAP are now more closely aligned with earlier recognition of impairments Most believe that both Boards’ approaches to estimating uncollectible accounts represent improvements and address the weakness in previous bad debt accounting that was highlighted by the financial crisis Time will tell if one model or the other provides more useful information to investors and creditors 7-103 LO COPYRIGHT Copyright © 2018 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein 7-104 ... explain accounting issues Explain additional accounting issues related to accounts and notes receivables Explain accounting issues related to valuation of accounts receivable 7-2 Explain accounting. .. and valuation of notes receivable related to their recognition PREVIEW OF CHAPTER Intermediate Accounting IFRS 3rd Edition Kieso ● Weygandt ● Warfield 7-3 LEARNING OBJECTIVE Cash Indicate how... related items Cash  Most liquid asset  Standard medium of exchange  Basis for measuring and accounting for all other items  Current asset  Examples: Coin, currency, available funds on deposit